Telstra remains firmly in the driver's seat in NBN race

By Tony Brown

Anyone reading the Australian press in the wake of the government’s decision to eject Telstra from the tender process to build and operate the National Broadband Network would have concluded that the market giant had been dealt a knockout blow. The reality is actually very different.

Telstra is the most robust and ferociously competitive players in the Australian corporate landscape, and anyone who thinks that its Dec. 15 exclusion from the NBN tender is a truly significant blow has not been paying attention to how Telstra has come to dominate the local pay TV, fixed-line, broadband and mobile markets.

Telstra knew it was taking a risk when it initially bid to build the network only in major cities, rather than nationwide, as the government wants.

The firm said it was unable to submit a bid to build a full national network because “a number of fundamental issues have not been resolved” by the government. The move was really an effort to force the government to give it the regulatory breaks it has long been demanding before committing itself to a nationwide rollout.

Telstra’s key demands were that there be no subloop unbundling on the NBN, that there be no joint ownership of the network with a third party and that the government agree not to try to break up Telstra into network and retail operations.

As a result of its high-wire strategy, Telstra – and particularly its high-profile CEO, Sol Trujillo – could not have been totally surprised when the communications minister, Stephen Conroy, called their bluff and kicked them out of the NBN tender process, leaving three firms in the running, most notably SingTel Optus and Canadian bidder Axia.

Despite the press hysteria after Telstra’s exclusion – during which time Trujillo became just about the most despised CEO in the country, with one prominent columnist calling him “disgraceful” – calmer heads are beginning to prevail.

A consensus is emerging that Telstra’s exclusion from the tender is just as much a political maneuver from the government as was Telstra’s original decision to propose only a skeleton NBN.

Conroy realized he could not allow Telstra to get away with its attempt to commandeer the tender process and had to attempt to assert his authority – hence the announcement of Telstra’s exclusion and the subsequent two days of saturation press telling the world that Telstra had been firmly put in its place.

However, after taking more than a year to even bring the NBN to the tender process – during which time he assessed the intricate details of Telstra’s nationwide network – Conroy knows that no nationwide NBN can be built without getting Telstra on board. The company is just too powerful and controls way too much.

Despite his political grandstanding, Conroy fully understands this, and you had better believe that Trujillo understands it even better and won’t have minded coping with a couple of days of bad press as long as Telstra gets the NBN deal it is after in the longer term.

Telstra has kept a low profile since being kicked out of the tender process, with its chief PR flak saying to local press only that the firm had “copped it on the chin” and adding that seeking legal redress against its exclusion was “not a priority” – all while pigs flew serenely past his window.

Anyone who has watched Telstra operate in the decade since its privatization – and especially since Trujillo arrived as CEO in July 2005 – knows that the firm, to paraphrase the words of US President-elect Barack Obama, “doesn’t do cowering” and can be expected to come off the ropes throwing heavy legal punches when it deems the time is right.

Telstra has proved time and again in the past decade that it fights harder than anyone when backed into a corner. The problem for the government is that although it might have the morally righteous wind at its back with its determination to have a fair and open tender process for the NBN, the political winds are blowing strongly against it.

Prime Minister Kevin Rudd made the fast-tracking of the NBN a high-profile facet of his November 2007 election campaign and successfully used his focus on providing the country with a world-class ubiquitous broadband network as a key differentiator between himself and the aging incumbent, John Howard, for whom broadband was never a major policy issue.

However, more than a year after Rudd’s election the NBN is still barely out of the starting blocks, and Rudd faces a fresh election in less than two years, so time is running out.

It would be a huge political embarrassment for Labor if it arrives at the next federal election with the NBN still in its infancy, but that is precisely what will happen unless it makes nice with Telstra and prevents the kind of legal impasse that will block the NBN from coming to fruition for years.

In addition, after inheriting a healthy budget surplus from the previous Coalition government, Labor has been forced by the global economic downturn to accept that there will soon be a budget deficit and that it will remain that way for some time – a major political blow.

As a result, political pressures are likely to force the government to deliver an NBN that requires it to spend not a cent more than it needs to in order to get the job done.

Telstra is fully aware of this and is already deploying its substantial PR resources into getting the message out that it can build the NBN far more cheaply and with way less reliance on the public purse than any of its rivals … if only the government would give it the regulatory breaks that it wants.

Despite the furor over its exclusion from the NBN tender, Telstra remains firmly in control of the process, given its dominant position as an infrastructure owner. The pressure is on Conroy to broker a deal with the firm that brings it back into the fold to make sure the NBN becomes a reality.